A Turnaround Plan for Best Buy is Not Complicated
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Despite widespread discussions within the retail, investment, and technology communities lately about the issues plaguing electronics retailer Best Buy (NYSE: BBY), the company's lack of major initiatives to regain sales momentum has been surprising. And now there are even more distractions as co-founder Richard Schulze makes a half-hearted (so far) effort to put together a private equity-led offer to buy the company. To me, Best Buy's options are both limited and quite obvious.
Best Buy has really been faced with two headwinds in the consumer electronics retailing industry; a shift to sight-unseen online purchases, even for large electronics ("kicking the tires" has become less important with so many in-depth and reliable consumer reviews online), and enticing offers of cheap or free shipping and a lack of sales tax collection from online-only retailers like Amazon (NASDAQ: AMZN).
Fortunately for Best Buy, the sales tax advantage is likely coming to an end. Amazon is now agreeing to phase-in sales tax collection in states it previously fought. Given state budget problems nationwide, CEO Jeff Bezos clearly sees the writing on the wall and would rather play nice, make the change, and move on with minimal disruption.
From Best Buy's perspective, this is good news, as it leaves them with a single challenge; no longer becoming a showroom for extremely price conscious shoppers who are fine buying on Amazon after they "kick the tires" at Best Buy, if they even care to see the actual product in-person first.
The solution for Best Buy seems obvious to me. Amazon and Wal-Mart (NYSE: WMT) have been undercutting them on price, and Best Buy has not really responded. The solution for Best Buy should be to simply price match all their competitors, online and offline alike.
Since Amazon tends to simply match or slightly undercut their brick and mortar competitors on most items, to ensure they offer the best price, it would be risky for Best Buy to offer to beat other retailer's prices. That would just send pricing into a downward spiral since Amazon (and likely Wal-Mart) would match them dollar for dollar. By offering to match everybody else, Best Buy avoids bringing overall pricing down (which would crush margins further, something they can't afford much of these days), but eliminates the appeal of "kicking the tires" in a Best Buy store and then going home and buying from Amazon.
A simple everyday price matching policy on ANY competitor's price would bring Best Buy into competitive parity on pricing. Then they could use their existing store base as an advantage over both Amazon (with no retail stores) and Wal-Mart (with clear limits on available square footage that can be devoted to electronics).
If Best Buy were to go this route, they could simply advertise that consumers can come in, try out a product, and get the lowest price, guaranteed. For shoppers who like to research electronics purchases in-person, there would be little incentive to buy elsewhere (Best Buy's stores are large, so they can offer the plenty of variety). In fact, previous customers who were loyal to Best Buy but absolutely had to get the lowest price (and therefore switched to Amazon) might even return to the stores.
Online-only shoppers would likely still use Amazon, but they weren't going to drive to a Best Buy to begin with. Even former Best Buy customers who no longer shop in-store at all may be able to be convinced to shop online on Best Buy's web site (and not Amazon's) if Best Buy offered them incentives on shipping and/or plugged their Reward Zone loyalty card.
To me, Best Buy can still make a simple change and be a strong, profitable brick and mortar electronics retailing leader. A price match guarantee, including online competitors, seems to give them the best chance, especially with online sales tax collection becoming a reality nationwide in the future. Best Buy's new message would not only be simple, but it really could close the competitive gap that is crushing them right now. Without such a change, a turnaround might not be possible.
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